Should States Be Allowed To Declare Bankruptcy? States are in dire financial trouble because of the coronavirus pandemic. Some Republican leaders in Washington D.C. have suggested states declare bankruptcy, but is that a possible option?
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Should States Be Allowed To Declare Bankruptcy?

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Should States Be Allowed To Declare Bankruptcy?

Should States Be Allowed To Declare Bankruptcy?

Should States Be Allowed To Declare Bankruptcy?

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States are in dire financial trouble because of the coronavirus pandemic. Some Republican leaders in Washington D.C. have suggested states declare bankruptcy, but is that a possible option?

LULU GARCIA-NAVARRO, HOST:

Many states are facing severe financial shortfalls because of the coronavirus outbreak. Several Republican leaders in Congress, including Senate Majority Leader Mitch McConnell, have suggested those states declare bankruptcy. But federal law prevents states from doing that. Kentucky Public Radio's Ryland Barton reports that McConnell's cash-strapped home state is especially vulnerable.

RYLAND BARTON, BYLINE: Kentucky was struggling before the coronavirus. It's endured years of escalating budget cuts that go back to the 2008 financial collapse. And now, almost a third of the state's workforce has filed for unemployment. This has led to a massive drop in income and sales tax collections, which make up more than three-quarters of the money Kentucky brings in every year. Democratic Governor Andy Beshear is one of many governors who say they need more financial help from the federal government during the pandemic.

(SOUNDBITE OF ARCHIVED RECORDING)

ANDY BESHEAR: If the next CARES Act package does not include budget assistance for states and counties, we will be hit with a rougher recession. It will last longer, and it will be harder to dig out of.

BARTON: Kentucky's senior senator, Mitch McConnell, doesn't support adding more money to prop up state budgets, at least not without changes - changes like letting states file for bankruptcy. Here's McConnell on "The Hugh Hewitt Show" recently.

(SOUNDBITE OF RADIO SHOW, "THE HUGH HEWITT SHOW")

MITCH MCCONNELL: I would certainly be in favor of allowing states to use the bankruptcy route. It saves some cities. And there's no good reason for it not to be available.

BARTON: But cities, counties, even school districts are allowed to file for bankruptcy, just not states.

KEN KATKIN: That has always been the case for the entire history of the United States.

BARTON: That's Northern Kentucky University law professor Ken Katkin. He says Congress could pass a law allowing states to file for bankruptcy, but then states would have to pass their own laws allowing it, and then it would likely be challenged for violating the Constitution's contract clause.

KATKIN: The main reason that that clause is there is so that states shouldn't be able to pass laws to relieve themselves of their own debts or to relieve the debts of private debtors.

BARTON: Bankruptcy would allow a court to restructure a state's finances. The biggest example of a city declaring bankruptcy was Detroit in 2013. As part of that process, a court required city retirees to take a 4.5% benefits cut and give up cost-of-living adjustments.

University of Pennsylvania law professor David Skeel says states should be allowed to declare bankruptcy. He says it would allow sacrifices to be distributed more evenly.

DAVID SKEEL: Absent bankruptcy, who is it that gets hit if there's financial distress of a state? It's beneficiaries of state services.

BARTON: President Trump has weighed in on Twitter, asking, why should taxpayers bail out, quote, "poorly run states" like Illinois? McConnell has since softened his suggestion that states be allowed to declare bankruptcy, saying it would have been optional, and most wouldn't have done it anyway. But with so many states struggling, it's still an issue capturing attention from statehouses to Capitol Hill.

For NPR News, I'm Ryland Barton in Louisville, Ky.

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